The Regulatory Estoppel Myth
Jack Sullivan, Post & Schell, P.C.
“One of the most hotly litigated insurance coverage questions of the late 1980’s and early
1990’s has been the scope and application of the pollution exclusion.” Madison Construction
Co. v. Harleysville Mut. Ins. Co., 557 Pa. 595, 605, 735 A.2d 100, 106 (1999). The reason is
obvious: industrial polluters are confronting billions of dollars of environmental cleanup liability
resulting from their long-term waste disposal practices. In Pennsylvania, these companies have
faced a significant obstacle. For more than 15 years, every Pennsylvania appellate court that has
addressed the pollution exclusion has found that it unambiguously bars coverage for claims of
property damage caused by repeated or long-term discharges of pollutants. See, e.g., Lower
Paxon Twp. v. United States Fidelity & Guaranty Co., 383 Pa. Super. 558, 577, 568, 557 A.2d
383, 402, alloc. denied, 523 Pa. 649, 567 A.2d 653 (1989); Techalloy Co., Inc. v. Reliance Ins.
Co., 338 Pa. Super. 1, 13-14, 487 A.2d 820, 827 (1984). As a result, policyholders no longer
focus their attack on the policy language itself, but instead claim that the language should be
nullified under a variety of theories. The latest attempt to delete the pollution exclusion occurred
on March 5, 2001 when the Pennsylvania Supreme Court heard argument in Sunbeam Corp v.
Liberty Mutual Ins. Co., 1999 Pa. Super. 261, 740 A.2d 1179 (1999), appeal allowed, 562 Pa.
131, 753 A.2d 1265 (2000).
From the early 1970’s until the mid-1980’s, most comprehensive general liability (CGL)
policies included a pollution exclusion which eliminated coverage for liability arising out of the
discharge of pollutants unless the discharge was “sudden and accidental.” The sudden and
accidental exclusion was later replaced by an absolute exclusion, which was the subject of the
Madison Construction case. The effect of the sudden and accidental exclusion was to eliminate
coverage for pollution liability based on the routine discharge of pollutants. As a result of the
operation of this exclusion, coverage would potentially be available only when pollution resulted
from a sudden, boom-type accident.
The initial attacks on the exclusion were directed at the policy language itself and
particularly, the word “sudden.” This tactic is exemplified by Lower Paxon. Although the
insurance policy at issue in that case contained the sudden and accidental pollution exclusion, the
insured sought insurance coverage for damages caused by the gradual, repeated release of
pollutants. The insured claimed that the pollution exclusion clause was ambiguous on the
grounds that “sudden” could be construed to mean non-intentional. Judge Beck disagreed,
finding there was no ambiguity and that the plain meaning of “sudden and accidental” imposes a
double requirement — the discharge must be both non-gradual and unexpected in order for
coverage to apply.
Over the next ten years, the pattern remained roughly the same. In case after case,
policyholders tried, but failed, to convince state and federal courts in Pennsylvania that the
wording of the sudden and accidental exclusion was ambiguous. Although the Pennsylvania
Supreme Court had not addressed the issue, there was a substantial and unanimous body of
Pennsylvania precedent that the sudden and accidental exclusion as written afforded no coverage
for pollution caused by routine waste disposal.
In some cases, policyholders attempted to avoid the pollution exclusion by relying on the
so-called “reasonable expectations” analysis. These attempts were equally unsuccessful. First,
reasonable expectations has been applied in Pennsylvania only in very limited circumstances,
none of which are applicable to commercial entities facing pollution liability. See Gamble Farm
Inn, Inc. v. Selective Ins. Co., 440 Pa. Super. 501, 505 n.1, 656 A.2d 142, 144 n.1 (1993) (“We
note that the ‘reasonable expectations’ analysis for the interpretation of insurance policies does
not command a majority of our supreme court.”) Moreover, even if reasonable expectations
applied at all, the Pennsylvania Superior Court had already determined that it would be
“blatantly unreasonable” for a policyholder to expect that the sudden and accidental pollution
exclusion allowed coverage for long-term pollution. Lower Paxon, supra, 383 Pa. Super. at 577,
568, 557 A.2d at 402.
The policyholders’ strategy shifted in the 1990’s. Policyholders like Sunbeam began to
claim that the actual contract language was not the critical factor, but rather that courts should
rely on extrinsic evidence to modify, or even contradict, the express terms of the contract. This
approach turns standard contract analysis on its head, and is directly contrary to Pennsylvania
law. The Pennsylvania Supreme Court has repeatedly emphasized that a court’s “only aim” must
be to “ascertain the intent of the parties as manifested by the language of the written instrument.”
Madison Construction, supra, 735 A.2d at 108 (citations omitted). Therefore, “[w]here . . . the
language of the contract is clear and unambiguous, the court is required to give effect to that
language.” Id. at 106 (emphasis added).
The principal support cited for the outside-the-contract approach is the decision of the
New Jersey Supreme Court in Morton Int’l, Inc. v. General Accident Ins. Co., 134 N.J. 1, 629
A.2d 831 (1993). In Morton, the court recognized that the plain meaning of the word “sudden”
possessed a temporal element. Nonetheless, the court declined to give effect to the literal terms
of the pollution exclusion on the grounds that the insurance industry had allegedly duped New
Jersey insurance regulatory authorities when the exclusion was submitted for approval and that
insurers should therefore be estopped from enforcing the exclusion as written.
The linchpin for this conclusion was an explanatory memorandum provided to insurance
regulators at the time the exclusion was submitted for approval. After quoting the exclusion, the
memorandum states, in part: “Coverage for pollution or contamination is not provided in most
cases under present policies because the damages can be said to be expected or intended and thus
are excluded by the definition of occurrence. The above exclusion clarifies this situation so as to
avoid any question of intent.” The New Jersey Supreme Court, in what was essentially a de novo
finding of fact, concluded that this memorandum was deliberately misleading. Morton, supra,
629 A.2d at 853. The motivation for the alleged misrepresentation was that if the insurance
industry had acknowledged the true scope of the proposed reduction in coverage, regulators
would have been obligated to consider imposing a correlative reduction in rates.
There had been no evidentiary hearing on the regulatory history of the pollution
exclusion in Morton. This is hardly surprising since Morton itself had never argued the
regulatory estoppel approach at any stage in the proceedings. The decision is premised on a
fragmentary evidentiary record submitted after oral argument by policyholder’s amicus. These
procedural irregularities have undoubtedly contributed to the overwhelming rejection of the
Morton decision outside New Jersey. See, e.g.,Federated Mut. Ins. Co. v. Botkin Grain Co., 64
F.3d 537, 541 (10th Cir. 1995); Anderson v. Minnesota Ins. Guar. Ass’n, 534 N.W.2d 706,707
(Minn. 1995). However, even setting aside questions as to the way in which the Morton court
reached its decision, there are several fundamental problems with the conclusions reached in that
case.
The primary difficulty with the regulatory estoppel theory is that it “rests on the
assumption that the regulatory bodies of the various states did not function as regulators.”
Sunbeam Corp v. Liberty Mutual Ins. Co., 37 Pa. D.&C.4th 44, 60 (1997). First, it requires a
court to conclude that when the insurance industry submits proposed policy language for
approval, the regulators never bother to review the language, but instead rely solely on what the
industry says it means. In fact, the request to the Pennsylvania Department of Insurance for
permission to include the pollution exclusion was made in May 1970, but not granted until
November 1970.
Moreover, it requires the court to believe that Pennsylvania’s insurance regulators have
been blind to the countless cases interpreting the sudden and accidental pollution exclusion since
Techalloy was decided in 1984. Under Pennsylvania law, the Insurance Commissioner has the
power to withdraw approval of forms which had been approved previously. Physicians Mutual
Ins. Co. v. Denenberg, 15 Pa. Commw. 509, 327 A.2d 415 (1974). The Insurance Commissioner
has made no move to withdraw approval of the pollution exclusion. If the Insurance Department
actually believed it had been hoodwinked, isn’t it likely it would have taken action by now?
In addition, regulatory estoppel has obvious separation of powers implications. It
requires the judiciary to determine the actual reasons for the decisions of an administrative body
established by the legislature. These difficulties are only compounded by the fact that the
decisions under scrutiny were made 30 years ago.
As a result of these difficulties, both the trial court and the Superior Court in Sunbeam
found that the regulatory estoppel theory did not constitute a legally cognizable claim. This
conclusion was legally correct. Equally important, the regulatory estoppel theory is factually
insupportable.
In the first place, the Morton court ignored the historical context in which the pollution
exclusion was written and submitted for approval. At the time the exclusion was first included in
CGL policies, environmental claims were rare. The pollution exclusion was submitted to the
Pennsylvania Department of Insurance less than two months after the first Earth Day, EPA was
not yet in existence. With the enactment of Superfund a decade later, industrial concerns faced
increased and significant environmental liability, and the pollution exclusion became significant.
However, it is unfair to look at insurance industry submissions with the benefit of 20-20
hindsight and then accuse insurers of deception for not having the gift of prophesy.
In addition, a full record would completely undermine the regulatory estoppel theory. In
the aftermath of Morton, attorneys for insurers and the chemical industry have searched, and
found, former members of state insurance regulatory agencies in nearly every state. Over 50
affidavits from former regulators were submitted in Carrier Corp v. Home Ins. Co., No. CV-88352383-S (Conn. Super. Ct., Oct. 21, 1994). The Carrier court concluded that Morton seems
“grossly insulting to the members of all the regulatory agencies for it implies that all of them
accepted the statements made to them by ‘the industry’ changing the meaning of an
unambiguous clause. That suggests, at the kindest, naivety and passivity. The over 50 affidavits
of regulators submitted by [the insurers] . . . support neither naivety nor passivity in our case.”
Slip op. at 4.
It is respectfully suggested that the Pennsylvania Supreme Court has correctly determined
how insurance contracts are to be interpreted. The “polestar” of the inquiry is “the language of
the contract.” Madison Construction, supra, 735 A.2d at 106. Every Pennsylvania appellate
court which has read the exclusion has found it to be straightforward and unambiguous. There is
no reason to believe that the Pennsylvania Department of Insurance was unable to understand it,
or failed to read it, when the exclusion was approved for use in Pennsylvania. Regulatory
estoppel is a myth, which has no place in Pennsylvania law.
John C. Sullivan is a partner with Post & Schell, P.C. and is the head of the Insurance
Coverage and Extracontractual Department. Jack has devoted his practice to the area of
insurance coverage and is a frequent lecturer on insurance coverage matters. Jack is admitted to
practice in both Pennsylvania and New Jersey. He can be reached at Post & Schell, P.C., 1800
John F. Kennedy Blvd., 19th Floor, Philadelphia, PA 19103, PH: 215-587-1487, FAX:
215-587-1444, e-mail: JSullivan@PostSchell.com.